Have changes in the financial structure affected bank profitability? Evidence for Austria

We examine the impact of changes in the financial structure of the Austrian banking sector over the past 15 years, such as disintermediation, internationalization and privatization, on the profitability of banks. Several proxies based on bank balance sheet data at the micro-level as well as macroeconomic variables are used to capture these changes. The case of Austria is particularly interesting because the opening up of the Austrian banking sector due to EU accession and the strong engagement of Austrian banks in Eastern Europe coincided with the global trend toward deregulation of banking activities. Our estimation results, which are based on dynamic panel regression methods, indicate that disintermediation (a lower percentage of loans over total assets) and higher market concentration in the banking sector had a positive effect on bank profitability, while changes in the ownership structure (privatization and increased foreign ownership) as well as more foreign lending by Austrian banks did not have a clear-cut or significant impact on bank profits.